Northcape

Property Services


“The good oil”, an old Australian expression that refers to the practice of giving reliable, sound and truthful advice on a given subject - I thought this was an appropriate name for my blog.

The following articles have been written by me and primarily relate to retail property leasing and more broadly the retail industry in Australia. They are designed to be interesting and to assist retailers, however from time to time I will also make comments and observations about economics, geopolitics and social affairs here in Australia and overseas that I believe have a bearing on the retail industry.

All articles that I write are my own personal views and whilst I take great care when researching all subject matter, anyone reading these articles should do their own research and should not rely on any views expressed in my blog. You should always do your own independent research to satisfy yourself before embarking on any business venture.

I hope you enjoy my blog, “The Good Oil”

Cheers
Michael

How is customer service relevant to your lease ?

How important is customer service to your retail business? Most owners would say that good customer service and strong relationships are fundamentals of running a successful business. Seems obvious, right? Well in theory yes, but in practice there are plenty of shoppers who have encountered poor customer service at some point in their lives. As a retailer this should be abhorrent to you – of course retailers are human, we all have off days when things just don’t seem to be going our way. There are myriad of reasons for this, including personal issues such as financial stress, relationship problems, health challenges etc…however we must try to shield our own personal issues from customers.

The reality is your customers have their own personal issues to deal with, so the last thing they want to hear is you grizzle about how quiet trading has been during the past few days or how your landlord is unreasonable. Whilst some of your customers may sympathise with you on the surface, they really aren’t that interested and are probably just being polite.

With nearly 30 years in the retail industry having worked on the landlord side of the equation for most of that period, I encountered many retailers who would otherwise have had strong businesses, had their customer service skills been up to scratch. During my daily walks around my shopping centre as a Centre Manager, I would often chat to retailers about how business was – whilst most retailers were even handed with their feedback, some negative retailers blamed all their woes including falling sales and declining profits on everyone else (including their customers) – they did not think for one moment that the source of their problems may have lied with themselves!

Imagine blaming your financial performance of your business on your customers – I remember hearing all manner of crazy explanations such as “old people just don’t buy enough product” and “my customers are very price conscious and don’t like paying a lot” and “customers these days just don’t have any loyalty”. Instead of blaming the very people who they relied on to generate sales and by definition, their livelihood, these retailers should have taken a good hard look in the mirror and asked themselves – I am the problem, does my negative attitude and that of my staff stink ? Are we providing poor service?

In the shopping centre industry we would often gauge customer attitudes towards individual retailers, through research that included exit surveys and focus groups carried out by independent third parties – funnily enough the vast majority of those retailers with the lowest customer feedback scores were the same retailers who’s sales were declining and often corelated with their rent payments falling behind.

In each of these cases I believe the retailer had simply missed the mark in terms of meeting the wants and needs of their customer – they weren’t focused on looking after the very people that they needed to satisfy.

From a landlord perspective, especially within a shopping centre environment, it is fairly obvious which retailers have good customer service and those who do not. As mentioned there are plenty of indicators such as poor sales, climbing rental arrears and badly maintained stores. In many cases landlords also receive direct customer feedback from shoppers who simply walk into the Centre Management office and complain about how poorly they have been treated.

When it comes to renewing a lease, most landlords will not look favourably upon a retailer who exhibits poor customer service, as more often than not this same retailer is not likely be meeting their obligations under their lease. If the landlord has an opportunity to replace this retailer, they may not offer a new lease to the incumbent operator meaning their business would be impacted significantly.

So remember, good customer service is integral for so many reasons, including the security of your leased premises….

 

 

 

 

 

 

Negotiating a lease….know your business

During the course of negotiating leases on behalf of my clients, I am often asked all manner of questions such as where is the best location for my business, what size premises are ideal, how much rent should I pay etc…?

I am always happy to provide recommendations about such matters, however it really is up to my clients to understand their own business model and have clear views on these types of issues.

Successful retailers usually have a very strong understanding of what works and what doesn’t work in terms of trade area, shop location, size of premises, orientation/shape of premises and acceptable gross rent. They are able to accurately assess a given trade area to determine how their product/service will be accepted and will often have a specific formula for determining how many transactions are likely to occur and the average sale per transaction.

Once a retailer has determined the level of annual sales that can be achieved, they will work backwards to calculate how much gross rent they can afford. This will be determined by the level of gross profit the business is likely to generate – a low gross profit business such as a newsagency can only sustain a low rent to turnover ratio of around 5-8%. Of course the inverse is true for a high gross profit business such as a jeweller, as they can sustain much higher rents.

It is not uncommon for successful retailers to own more than one retail business, so these operators are easily able to draw upon their experience and historical trading data to create a system that works for them. Over a period of time these owners develop an intimate understanding of all aspects of their business, so when it comes to negotiating a new lease, they intrinsically know their metrics and limitations. Being intimate with the metrics of your retail business is therefore imperative, otherwise you can fall into the trap of signing a new lease that just doesn’t work for you.

Over the past 5-10 years the retail sector has been under attack from a myriad of factors such as on-line retailing, increased competition from new players in the marketplace, low  wages growth and high household debt. As a result, many retailers have fallen over which has resulted in increased shop vacancy rates, so landlords have struggled to grow rents and keep a lid on vacancy rates, especially in regional areas.

Of recent time I have noticed a trend emerging with many landlords pressing retailers to  take on larger spaces, no doubt due to the difficult leasing market. On many occasions I have had to persuade landlords not to push my clients into taking unnecessary space, when they clearly have no need for it. Generally speaking the larger the space, the greater the rent (not to mention additional cost of fitting out and stocking these premises), so it’s not necessarily in your interest to take space in excess of your requirements.

Landlords often offer leasing incentives such as rent free and/or capital to encourage retailers to take more area, however this can be perilous. If the shop area is much larger than what you require, you are may end up paying a higher long term rent that is not sustainable, as well as possibly creating major stock issues, both of which can lead to severe financial distress.

If you are planning to enter into a new lease, I highly recommend that you thoroughly analyse your business, know your metrics and develop a clear set of leasing parameters and try not to deviate from them.

 

 

 

 

Location, location, location …

I was recently appointed to act on behalf of a retailer who had been having difficulty negotiating a new lease with his landlord on a potential new site within his shopping centre.

Up until my appointment, communications between the two parties had completely broken down. Whist both sides were keen in principle to relocate this particular retail business to a better location within the centre, they just couldn’t come together on the commercial lease terms.

On reviewing all of the facts surrounding the situation, I learned that this retailer had quite a strong business, but it was currently located at the far end of the shopping centre, with no major tenants nearby. This section of the mall was about to be redeveloped and the retail tenancy mix altered to the point where I thought staying in the existing location would have been detrimental to my client.

By contrast, the alternate location proposed by the landlord was very close to a strong supermarket trading at over $50M pa – the surrounding precinct was also going to be refurbished and would soon include a second supermarket which would undoubtedly generate a huge amount of foot traffic.

Whilst my client agreed that the proposed new site was a better location, he was very agitated about the fact that the landlord wanted 50% more rent for the new site. The interesting fact was that this retailer still had about 2 years remaining on his existing lease, so the landlord was quite content to leave my client in his existing shop, unless he was more realistic about paying a market rent for the new site. Importantly this was not a forced relocation, the landlord just thought that offering the new site to my client was the right thing to do – it was good for him, good for my client and right for the centre’s tenancy mix (something which I completely agreed with).

Before I commenced negotiations with the landlord, my client and I had a robust debate about what we thought was a fair market rent. My client cited lower rents that other retailers where paying throughout the centre, so he could not accept that the landlord wanted to charge more rent just because he was making improvements to the centre.

Of course my objective is to always achieve the best possible commercial deal for my client, but the best deal doesn’t always mean securing the cheapest rent, it means securing the best possible location on the best commercial lease terms.

I did think that the landlord’s asking rent for the new site was on the high side, but not to the same extent as my client. The other important fact that my client kept glossing over, was that this was not a market review, nor was it a forced relocation, so the landlord had absolutely no obligation whatsoever to offer the new site or negotiate the rent. In fact the landlord could ask for whatever rent he desired as my client was already bound to a legally binding exisiting lease for a number of years.

I had to confront my client and be honest with him, so I asked him a few simple questions;

  • Which was the better location in terms of adjacent major retailers, the existing shop or the proposed new site?

 

  • Which location would have the highest foot traffic?

 

  • Which location was likely to generate incremental sales and profit growth ?

 

  • Which location was going to increase the profile of his business medium to long term?

 

  • If you don’t embrace this opportunity and be more realistic on the rent, what is the long term future of your business in the current location?

 

I am sure that you can guess what my client’s response was, of course the new location was superior in every way, so my client started to realise that he should be more realistic about how much rent he could pay. Remember, the landlord didn’t actually have to offer the new site to my client, so I reminded him of this fact and the alternate future if he stayed in the old location.

In the end we agreed on revised leasing parameters and I successfully negotiated what we both thought was a good lease deal on the new site. I managed to reduce the asking rent by 20% (in addition to gaining some leasing incentives) but yes, the new rent was higher than the current shop’s rent, but in our opinion it was worth it. We had secured one of the best locations in the shopping centre and my client was confident that increased profits that he would generate from this new site, would more than cover the new rent, many times over in fact.

We secured the future of his business by observing an old real estate maxim, “always go for the best location !  Location, location, location……” !

 

 

 

 

 

Media Spin…..

I haven’t written a blog for a while, due to a number of reasons not the least being the growth of Northcape. We have been growing strongly and are presently in the midst of moving into a larger office and hiring new staff, so it is all very exciting.

Like most of you, I have been watching what has been happening in the retail industry, particularly over the past 12 or so months and just could not sit by any longer without venting my anger and dismay over “spin” coming out of the main stream media.

I don’t want to be a purveyor of doom and gloom, but the Australian retail industry is doing it tough at present – there are a number of reasons for this, not the least being new international competitors and a few successful local operators taking market share, however I think the biggest issue is that consumers are loaded up with too much debt and are simply not buying and consuming as much as they used to. Wages haven’t moved in years and the real unemployment rate is probably around 10% not 5.7% as the media tells us.

With the recent reporting season just finished, anyone would think that the Australian economy is doing great, but once you scratch the surface, it’s not that good at all.

I recently read an article about how strongly a certain retailer’s share price “surged” and this led to the ASX moving higher. After reading another article about this same retailer’s actual financial results for the half, it turns out that underlying profit had dropped significantly and as a result, dividends were going to be slashed. Apparently their share price surged (up 4%) – perhaps investors thought that the worst was now behind them, I don’t know. From reading the headline article though, anyone would think that the company had a cracker of a year, but the complete opposite was true.

I also read some other headlines about a major retail landlord who apparently had another excellent result (given the state of the industry, I actually think they did do an excellent job of managing their business), however it wasn’t because of strong revenue growth, it was mainly due to cutting overheads and lower interest rate costs. Again when I read the headlines, it sounded like the retail industry was chugging along very nicely and retail was strong – what utter nonsense !  Whilst this particular retail property group is in my opinion a very good manager, the fact was revenue was down on last year by millions and millions of dollars.

Why would this be….. would it have anything to do with several large retail chains going to the wall over the past 12 months or perhaps many prudent retailers re-negotiating their rents down ? Last year about a dozen large retail groups collapsed (you know the names.) – since the beginning of 2017, five more retailers have either gone into administration or liquidation and word on the street is, there are more likely to fall over in the first half of this year.

There were many other retailers and other companies in different sectors who on the surface had very positive financial results for the half to December 2016, but after drilling through the detail, most of these companies had significant decreases in underlying profit, but why was this so?

I believe it is because the Australian economy is in pretty serious trouble and the retail sector by extension, is also. We are heavily burdened with debt, governments and households alike, in fact Australian household debt to income ratio is now nearly 190%, the highest on record and one of the highest in the world !

Australian national government debt is now well over half a trillion dollars !!! If you follow main stream media commentators, they all say that this manageable and much lower proportionally to many other advanced economies around the world. What a warped view that is…. it just means most of these other country’s governments are hocked up in way too much debt and we just happen have a bit less, yeah very encouraging.

The sooner we face up to the reality of what is happening, the sooner we can take action to try and arrest the problem – unfortunately with all the uniformed dribble coming out of the main stream media, most people believe everything is great, there’s nothing to worry about, we can just keep racking up the credit card, it’s all good.

My tip for the main stream media is, stop the “spin”, you are only adding to our financial problems !!!!!!

 

 

 

 

 

 

 

 

I need a rent reduction or do I….?

One of the most common questions I am asked by retailers is how to negotiate a rental rebate, even though they have a binding lease on foot.

In this blog I thought I would provide my thoughts as to how to approach your landlord for rental assistance, but before I do I think it is important that we first explore why and if a retailer might need a rebate in the first place. Whilst I am a retailer’s advocate, I think it is important that we are honest with ourselves when considering knocking on the door of a landlord to ask for financial assistance. When I say honest, I mean taking a good hard look at your business and asking yourself, “is the level of my rent the real issue or is my business fundamentally lacking in other areas”.

A client once asked for my advice about seeking a rental rebate from his landlord, as he felt that this would significantly improve his bottom line. After drilling down into his financials, I learned that his business’ annual turnover was about $180,000 and that it had made a loss of about $40,000 the previous year. His gross rent was just over $24,000 pa, however he was adamant that his rent needed to decrease as it was far too high and was the root cause of all of his woes.

Whilst I wanted to help my client from a leasing perspective, it was very obvious to me that the real issue wasn’t rent, it was a fundamental problem with the business itself. Annual turnover was way too low, in fact my client later admitted that that sales for this particular retail business should have been around $1-1.2M pa, rather than $180K pa, especially as it was positioned in a good location on a busy high street with lots of passing shoppers and no serious competition.

In my opinion no amount of rent rebate was going to materially improve my client’s financial position. If his landlord agreed on a 50% or even 75% permanent rent reduction, it would still mean that my client would make an annual loss of $22,000 – $28,000 based on the previous year’s performance.

In this particular case I advised him to actually not focus on a rent reduction at all, as this was only scratching the surface and really a distraction. I suggested that he needed to take a much closer look at his operation (after seeing the shop for myself, it was pretty obvious why turnover was so low – I don’t want to be disrespectful, but the state of his fit-out was appalling, I’m talking about cobwebs, blown lights, paint peeling off the walls, worn carpets and very low stock levels. To compound the issue further, his customer service was even worse than the state of the fit-out!  It was very obvious, this was not a rent issue, this was an operational issue, so in the end I recommended that he seek the advice of a very successful ex-retailer associate of mine, who had set up a consultancy business that assist troubled retailers.

In this particular case a rent reduction wasn’t really required, but of course there are situations where securing a rent rebate is appropriate and in fact, should be an expectation;

• In a shopping centre environment, where a landlord is conducting a major re-development and during the course of construction, they impact your business. In these circumstances most states and territories in Australia have legislation in place that permits tenants to claim compensation and that includes rental rebates.

• If your leased premises are unable to be occupied due to some form of natural disaster such as fire, earthquake or flood, many leases allow for rent to abate for a period of time.

• On rare occasions again in a shopping centre environment, if there is a significant change with one of the major tenants, this can have a very serious impact on traffic flow. A loss of a major tenant such as a large supermarket can significantly impact the surrounding specialty shops within the shopping centre.

So what about the situation where you actually have a strong, vibrant business that has a reasonable turnover, however you are struggling to make a profit and are fairly certain that you are paying a much higher rent than many of your neighbouring tenants. Even though you have a lease in place, I do believe it is worth talking to the landlord, however you need to consider the following;

  • First of all we need to understand the perspective of the landlord. Whether they are a small private investor or a large listed property trust (REIT), their objective is to make money. We shouldn’t begrudge landlords for this, as they are in business just like you are, so we should never treat them as the enemy.

 

  • The second issue to consider is the landlord has no legal obligation to reduce your rent (presuming you have a binding lease and don’t have any extraordinary circumstances such as those noted above).

 

  • The next question to ask yourself is “what’s in it for the landlord ?”. If they agree to a short term or permanent rent rebate, what is the impact to their bottom line and why would they accept this. Broadly speaking and depending of the valuation of their property, for every $1 in permanent rent reduction that a landlord gives a tenant will result in $10-$20 decrease in the value of their property. Doesn’t sound like that such impact does it ? Well lets look at an example where a retailer located in a small shopping centre is not trading very well and is seeking a $10,000 pa decrease in rent from their landlord. Using that same multiplier effect as noted above, the impact to the landlord’s valuation in this case is 10 times, so their asset value will be effectively decreased by $100,000 if they agreed to a permanent decrease. In the landlord’s mind the tenant is asking for a rent reduction that results in them losing $10,000 pa in cash flow, but more importantly it also reduces the capital value of their shopping centre by $100,000 ! The landlord is not going think that this is a $10,000pa question, they will think of it as a $100,000 question.

 

To counter resistance from a landlord, I will often recommend to my clients that they start by asking their landlord for a short term rebate (initially) for 3 months as a short term rebate doesn’t normally affect a landlord’s valuation just their cashflow, so they might be more responsive. However when that period expires, I encourage them to go back again for another 3 months and the same again in 3 months and so on. Eventually, we ask the landlord to make it a permanent arrangement, (a bit like cooking the frog so to speak).

Sometimes a landlord will agree to a permanent rent reduction, however you might have to trade off something of value to them. For example the landlord might agree to a major rent reduction but he may want you to take a new long term lease or perhaps they make wish to take back some area from your shop or they may want you to do a full refit of your premises. Of course you have to consider these types of trade offs on their individual merits, but often there can be a win/win outcome.

The key principle to bear in mind when seeking a rent rebate from your landlord is determining what you can trade off, so it is vital that you understand what your landlord is thinking and what is important them.

 

 

 

 

 

 

Do I need a professional lease negotiator…?

I was recently speaking to a potential client about representing him in lease negotiations and the inevitable questions arose as to why he should use my firm’s services and what could we achieve for him. Very fair questions, in fact I think all retailers should be upfront about assessing what results they can expect from their service providers, be it a solicitor, an accountant or perhaps a lease negotiator.

Upon talking further to this particular retailer, it was obvious that he was a very experienced businessman with many years in the retail industry (amongst other industries) and had previously negotiated several leases in the past. It appeared that he had plenty time on his hands and the ability to negotiate his lease renewal with a high level of competence, so I suggested that he probably didn’t require my services and recommended that he negotiate the lease himself.

Whilst I was quite confident that I could probably negotiate better commercial lease terms (I had a close relationship with his landlord), I actually think that he secretly wanted to do the deal himself as a personal challenge.

However not everyone has the experience, time or inclination to negotiate a lease themselves, so there are good reasons to appoint someone who negotiates leases for a living;

  • Arms Length – having a professional negotiate for you allows you to be at “arms length” with the landlord, so you can make partial decisions without feeling pressured at any time.

 

  • Market Intelligence – a good lease negotiator will have an understanding of your industry and be abreast of the type of deals being done in the market place.

 

  • Industry Network – this is more relevant if you are located in a shopping centre, however a good lease negotiator should have strong working relationships with most of the large retail landlords and as such, have a better chance of obtaining an optimum result for you.

 

  • Experience – most landlords be it large retail giants such as Scentre Group, Lend Lease, Stockland etc..or smaller landlords have professional leasing executives/leasing agents acting for them. Their sole focus is negotiating leases, day in day out. Many of these leasing executives will negotiate 30, 40, 50 up to 70 deals a year, so they are usually very good at their job. In contrast, most retailers would negotiate a lease once every 5 years, so in many cases these professional lease negotiators have an unfair advantage in terms of experience. Having a professional lease negotiator on your side, evens up the odds a lot more.

 

  • Optimising the deal – many good lease negotiators have worked on the landlord side of the equation at some stage in their careers. As such they should know how to push a deal in terms of rent, what incentives are able to be secured and when to close the deal or walk away. They should be able to drive the deal hard, as they simply have a lot of experience and are focused on a good outcome. This is especially so if the fee arrangement is based on achieving specific outcomes such as negotiating a lower rent and/or securing capital contributions and rent free periods.

 

  • Time (Opportunity Cost) – just like the old 1965 Ned Miller song says, “do what you do well”. Staying focused on your business and leaving lease negotiations to a professional, makes a lot of sense from a time & productivity perspective.

 

Even though there are plenty of compelling reasons to have a professional lease negotiator represent you, sometimes it is simply not worth it. For example if you are about to renew your lease and your existing rent is very low and not likely to increase significantly, then it may be more prudent to simply negotiate the lease yourself.

If however you are trying to renew your lease or starting a fresh lease and there is a strong likelihood that your rent will increase a great deal or you are going to have to pay for a costly fit-out then it is probably a good idea that you seek help from someone that negotiates leases for a living.

Permitted Use……getting it right!

Over the past few months I have come across some interesting cases where clients of mine have had major disputes with their landlords about their Permitted Use.

Permitted Use within the context of a retail lease, defines what a lessee is allowed to sell, so it is very important that the clause is carefully constructed to encapsulate all the desired products and services within the retailer’s range, both now and into the future.

This is especially important for retailers located within shopping centres, due to retail landlords being very particular about their tenancy mix. Generally speaking shopping centre landlords prefer usage clauses to be well defined and very narrow, so that they can control exactly who sells certain products & services.

On the hand smaller independent landlords with one or two free standing specialty shops, are usually a lot more relaxed about Permitted Use clauses, as they are generally not concerned about tenancy mix. If your business is located in free standing specialty shop, nine times out of ten, your landlord would not care nor be aware of what products and services you sell (provided of course they are not wildly out of character).

In a shopping centre environment, the situation is very different – in fact the cases mentioned above, all involved shopping centre landlords trying to restrict retailers from selling specific products and services.

Given challenging conditions facing the retail industry at present, any unnecessary restriction of products and services in your business, could have a detrimental impact on your sales and bottom line profit, so I thought I would explore how you might overcome such problems.

When you next renew your lease or enter into a new lease, one of the very first steps I recommend is to determine what your business is going to look like. By this I mean what are the core competencies of your retail business and what range of products/services are you going to specialise in (eg. I had a newsagent client that was located next to a number of art schools and over time he developed a very close working relationship with these schools and became their primary supplier of art materials. He supplied all manner of items such drawing pencils, fine paint brushes, canvasses, easels etc – he developed a real niche in addition to his more traditional newsagency lines).

Once you have determined what your specific niche is and you are clear about what your business is going to look like, then it is important that you create a Permitted Use clause that covers all of your desired products and services, but has enough flexibility in the wording to ensure that you are not restricted to just those products and services. The reason being that you might like to add or vary your range at a later date, in order to meet future customer demand.

If possible try to use phrases such as “ including but not limited to, retail sale of x,y,z and other products & services normally associated with a…….. ”. Of course you don’t have to use this exact wording, but it is important to use words that are general in nature, so as to give you maximum flexibility.

More often that not, you will have to haggle with your landlord in regard the final wording of your Permitted Use clause, however it is far better to resolve this at the time of negotiating a new lease, rather than becoming embroiled in a major dispute after the lease has been entered into.

What if you have a lease on foot with a Permitted Use clause that is a too narrow and your landlord wants you to reduce or remove certain products/ services that have been part of your range for some time?

Well, this is more challenging, however I wouldn’t immediately give in to your landlord’s demands – when a landlord requests that certain products/services be reduced or removed, it is often a result of another retailer complaining about you selling the same or similar merchandise. If you find yourself in this situation and your Permitted Use clause isn’t strong enough, I recommend that you organise a meeting with your landlord (or Centre Manager/Property Manager) and try to find a compromise. Often there might only be one or two key products that are controversial, so the solution might be as simple as removing these few items from your range or even relocating them out of prominent display. Of course sometimes it’s not that simple to find a quick solution, in which case it may be worth your while to appoint a professional lease negotiator or a good solicitor to help you resolve the dispute.

Of course it is far better to create a good Permitted Use clause at the time of negotiating a new lease, to avoid problems in the future.

 

 

 

 

What to do in a re-development….

Over the past few months a number of my retail clients have been impacted by shopping centre redevelopments. I realise that not all retailers are located in shopping centres, however a lot are, so in this article I thought I’d explore the dark art of shopping centre re-development, how to survive it and navigate through the process.

When a shopping centre is to be redeveloped, a landlord obviously believes there is an opportunity to add more space to rent, so the project is usually underpinned by securing one or more major or mini major tenants. To ensure the redevelopment stacks up financially, a landlord needs to add a significant amount of new specialty retailers who ordinarily pay much higher rents proportionally than major and mini major tenants.

In addition to adding retail space, a prudent landlord will often modernise the old part of the shopping centre (or at least they should do) which means a lot of demolition, construction and almost certainly business interruption.

Depending upon the scale of the redevelopment, it is not unusual for car parks, malls, entrances, common areas and large sections of retail shops to be impacted by construction. In most cases shoppers are also inconvenienced by the works, however this is very difficult to avoid, but that said a landlord is obliged to minimise disruption wherever possible.

Operating a retail business during heavy construction can be very challenging, especially if the number of customers frequenting your shop decreases significantly or worse, the landlord wishes to relocate you.

So what can a retailer do if they have a business in a shopping centre that is about to undergo a major redevelopment ?

  • Most Australian states and territories have specific retail lease legislation that offers some protection when it comes to re-development and relocation. If your centre is about to undergo a major re-development, I highly recommend that you review the retail lease legislation that applies to your particular state /territory.

 

  • The next most important task is to review your lease in detail to understand your obligations and rights as they pertain to redevelopment and re-location. I suggest that you have a competent solicitor also review your lease, just to ensure there are no inconsistencies with your lease and the relative legislation.

 

  • Before any major works are to take place in a shopping centre, a landlord will more than likely formally communicate details with all their tenants. It is imperative that any communications to your retail business are personally directed to you at all times to ensure that any issues involving relocation or redevelopment are brought to your attention immediately.

 

  • If there is a major redevelopment planned, it is usually a good thing and normally beneficial to everyone in the long term – a landlord intending to re-invest in their centre usually means there will be an improvement to the tenancy mix and common areas of the centre which should in theory attract more shoppers. To ensure that you are completely clear about the scope of the redevelopment and how it might affect you, I would arrange a one on one meeting with the landlord/agent to ensure you understand what is going on around you.

 

  • Ensure lines of communication are kept open at all times and that you have a harmonious relationship with your landlord/agent (if possible) – this is very important, particularly during the course of a redevelopment as there are often a lot of unexpected disruptions to business continuity such as intermittent loss of services (water, electricity, air-conditioning etc), as well as constructions noise, dust and vibration. The better your lines of communication with the landlord/agent, the quicker they can respond to these issues.

 

  • When you meet with your landlord/agent and you discover that your shop might be affected by construction or that they wish to relocate you, don’t be alarmed, hear what the landlord/agent has to say. They might actually offer a better location or attractive lease incentives, so I suggest that you do a lot of listening and not a lot of talking at the initial meeting and don’t commit to anything at this point.

 

  • Ask the landlord/agent to put everything in writing to you in the form of a proposal after the meeting to avoid any miscommunication. Once you receive the formal proposal, analyse the information and work out what it means to you in terms of both short and long impact. I recommend that you involve your accountant during this process, as they should assist you with financial modelling in terms of sales projections, cash flows, P&Ls, Balance Sheets etc.

 

  • If you believe that the landlord’s proposal is unfair or that you will be severely impacted by the project, ensure you review the relative retail lease legislation in your state, as most acts have safeguards in regard to these matters.

 

  • Do not be afraid to reject the landlord/agent’s proposal if you believe it is not in accordance with the law or detrimental to your business – if necessary I suggest that you engage a lease negotiator or solicitor to negotiate with your landlord/agent to improve your position.

 

  • If your landlord/agent advises you that there will not be any direct impact to you as they don’t plan to relocate you or your tenancy isn’t affected by construction this is good news, but be wary. It is important that you understand what the landlord is planning to do in the common areas, such as the malls, carparks, entrances, travelators, lifts etc. Very often construction to common areas will result in major declines in customer numbers which may impact your business significantly, so ensure that you understand what is happening and when.

 

  • Once construction starts, it is prudent to create a “Re-development Log” to record everything that is occurring in the centre that might impact your business. Issues such as dust, excessive noise, vibration together with any obstructions to traffic flow within the car park and mall areas, vertical transport etc.. anything at all that could be detrimental to your business – also I recommend that you take photographs wherever you believe it is necessary. The reason this is important, is that in most states/territories a landlord, must reimburse retailers for any loses that arise as a result of excessive business disruption, so the more objective evidence you have, the better your chances of obtaining fair compensation if the need arises.

 

For those of you in the midst of a redevelopment or about to go into one, I hope that the above has been useful to you.

Cheers,

Michael

 

 

“Negotiating – knowing what to give away, what not to give away and when”

In our last article we talked about how negotiating is a process that can’t be rushed. We also touched on the process, in terms of knowing what to give away, what not to give away and when.

In this article I’d like to explore the what and when of negotiating .

Before I embark on a new lease negotiation, one of the very first steps I take is to try to understand what my client’s key objectives are. I really try to hone in on what is important, what is a nice to have and what is not that important to them. Sometimes my clients don’t have this clearly identified and this is to be expected, after all it’s not every day that a retailer negotiates a new lease.

I often ask my clients to actually write down what is and isn’t important to them and to categorise these items in order of importance – I then work through the list and determine whether or not I am able to trade off some of the less important items for other objectives that are more important to my client. I find this approach very useful as it crystalises what the ideal outcome is for my client and they often feel far more comfortable knowing what the game plan is. I actually believe this is the most important step in the negotiation process, knowing what you won’t give away (non-negotiables) and what you can give away (negotiables).

After establishing this and the other key leasing parametres, I make an assessment of the landlord whom I will be negotiating with. Fortunately I know most of the large retail landlords and have a fairly good idea of what their key drivers are. For example, some large landlords are driven by valuation, so obtaining the highest possible rent psm/pa is very important to them, whereas giving large amounts of capital contribution is something that they will give ground on more easily (well…at least in the current market). Smaller landlords generally don’t don’t have access to large amounts of cheap capital, so their incentives are usually in the form of longer rent free periods, so I try to negotiate with these facts in mind.

I recommend that you undertake the same process of trying to identify what is important to your landlord and what isn’t so important – a good way of establishing this is to talk to your neighboring tenants whom might have recently negotiated a new lease. Without being specific, your fellow retailers might have some very useful background information that will help you build up a profile of what the landlord considers important to them. If you deal with an agent or leasing executive who acts for your landlord, they will often reveal how the landlord thinks, so it a good idea to make mental notes whenever you can.

When lease negotiations begin, you must be very clear on the issues that are important to you and what you are willing to give away – try to stick to your game plan, as deviating from it could be disappointing later on. I have seen many situations where retailers have given far too much away and too quickly only to regret their decision afterward.

As negotiations unfold there will naturally be a lot of back and forth communications, so this is where the “when” comes into play. As equally important as “what not to give away” and “what to give away” is when to give concessions away .

After negotiations have opened, I generally only give ground on the least important points early in the process and as we approach the pointy end of the deal, try to hold back on the more important trade offs for as long as possible and only release them if I have to. If I have been fortunate enough to achieve the objectives of my client, then I will not give any more ground at all. If however, I haven’t quite reached our goals, then I will drip feed the last “giveaways” in order to secure them.

It’s imperative to not release your “giveaways” too quickly as you will run out of trade offs and effectively have no room to maneuver.

Recently I was negotiating on behalf of a retailer – my client’s key objective was to significantly reduce their rent and when I mean significantly, I am talking many tens of thousands of dollars per annum. During the course of the negotiations I learned that the state of my client’s fit-out was a source of irritation for the landlord and something that they had wanted to be addressed for many years. Armed with this knowledge, my client and I created a list of cosmetic works that we were prepared to do and were not overly expensive. We prioritised each of these items in order of how important they were to the landlord and how costly they were to my client, starting from the least expensive to the most expensive

In this particular case we agreed to install new LED lighting, upgrade the main shopfront sign and do a repaint of the ceilings and walls, amongst some other minor maintenance issues. The landlord wanted a full upgrade including a new shopfront, ceiling, fixtures etc. however we were not prepared to do this, as the total cost would have been very expensive. As we had already prioritised what we could give in on, we drip fed these items during the course of the negotiations on the basis that the landlord agreed to reduce the rent to a level that we thought was acceptable. In the end we successfully negotiated a new lease, achieved a very large reduction in rent, with a trade off of doing some relatively minor works that actually benefitted my client, as their shop’s appearance was enhanced and contributed to a lift in sales.

One of the main reasons that we were successful, was that we knew what not to give on, what we were prepared to give on and when. I believe if you adopt these basic principles, they will assist you in your lease negotiations.

 

 

 

 

 

 

 

 

 

 

 

 

Negotiating a lease, a process you can’t rush…

Over the past 12 months or so I have been involved in several lease negotiations with retailers where an impasse had been reached with both parties seemingly unable to work through their differences.

In all but one of these cases the deadlock was eventually broken and a compromise reached with both retailer and the landlord being happy with the final outcome. The negotiations were long and tedious, however it couldn’t be helped given the high stakes nature of the areas being negotiated. (more…)

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